In new era, operators scorn over-the-top services at their peril

Telecom operators are standing at a critical crossroad. With a continuous decline in profit from voice and messaging services – thanks in no small part to the adoption of Over-The-Top (OTT) services such as Google Voice, Skype, Whatsapp (and my company Rebtel), among many others – operators must explore their options and seek out new revenue streams. As the industry gets increasingly complex and crowded, operators simply must have a firm grip on what their future business model is: Will they be demoted to mere bill carriers or will they embrace the potential for new revenues by partnering with OTT services?

The four waves of revenue

Telecom analyst Chetan Sharma says that the telecom industry has been through three distinct revenue waves in its history. First there was the voice wave, then messaging and finally data.

Both the first and second of these waves produced phenomenal profits for decades but now are in serious decline due to market saturation and the rise of consumer-friendly OTT alternatives. While many in the industry see the third wave as being a replacement cash cow, others believe operators must look beyond data revenue to the fourth wave: OTT and Value Added Services (VAS).

Having become accustomed to diets of “all you can eat” data bundles, consumers naturally expect the price of data to drop over time, not rise. If operators bump up data costs, we can assume consumers will respond by flocking to services like Freedom Pop, which relies on Wi-Fi as the main source of data, switching only to cellular data when Wi-Fi is unavailable. So while data will undoubtedly continue to be a major part of operators’ revenue, there is only so much cash they can directly extract from it. And more importantly it’s highly unlikely that that revenue will ever compensate for those lost from the decline in voice and text use.

The fourth wave is already building rapidly, as people are now using their mobiles to do everything from paying their grocery bills and online shopping to downloading digital media or even checking their medical records. Virtually all of these services are provided not by operators but by third parties. This has understandably rattled most operators’ cages. Many have panicked and gone so far as to throttle their users’ service in response – or even completely blocked them from using services such as Skype (and later defending their moves citing policies hidden deep in the terms and conditions of consumers’ contracts).

Industry discovers benefit of OTTs

In January 2012, the Internet Telephony Services Providers’ Association in the UK condemned mobile operators Vodafone, T-Mobile and Orange for their use of such anti-consumer practices, leading European Commissioner, Neelie Kroes, to call for greater transparency. And since then tide in Europe slowly seems to be changing.

In September Swedish operator Telia not only backed down on plans to charge customers extra for using VoIP services, but even introduced special VoIP packages themselves. Such a move is an implicit acknowledgment of how operators must embrace progressive technological change and the desires of their customers, instead of trying to thwart them.

Indeed, more operators are continuing to accept this view and have begun the process of working with OTT services. Weeks ago Deutsche Telecom teamed up with online music provider Spotify to give users the option to choose a payment bundle with unlimited music streaming– even going so far as to not deduct usage from the user’s data allowance. Crucially, such deals not only enhance an operator’s offering to customers, but instantly transform the OTT service from being a competitive threat or parasite to a valued business partner.

These types of partnerships are not unheard of, of course. Examples include, with varying degrees of success, Vodafone and Three working with Skype in the UK; or AT&T combining with Twilio; and Sprint working with Google Voice. The problem has been that many such OTT acquisitions or partnerships from previous years have often felt reactive rather than a proactive from operators. A high failure rate in such partnerships often confirmed this suspicion. When such partnerships are run effectively however everyone benefits: Consumers get more choice, operators have more to offer and OTT services get to monetize their software.

Recent months have also seen a surge in news relating to operators partnering with established companies from other industries. AT&T recently teamed up with computer giant IBM to offer cloud-computing resources to Fortune 1000 companies. A potentially hugely profitable venture.

Elsewhere, Telefonica set up a new division within its company to analyse and then resell user tracking location data, mining and monetising the huge amounts of real-time consumer data already available to them.

It’s do or die time

OTT services are not a passing fad – to the contrary they have become so significant as to be a legitimate fourth wave of revenue for the telecom industry. Operators then must seek to partner with (or compete with) OTT services, and monetize those efforts. Failure to do so will inevitably lead to ceding their turf, consigning them to be nothing more than data carriers.

To preserve their market position, operators need to be among the vanguard setting new industry trends, to be more flexible so they may respond quicker to market demands. And they must look for opportunities to form intelligent partnerships with relevant technology companies.

Operators are standing at a critical crossroad. They need to not only choose their path, but whom to walk it with.